December 23, 2022
Hong Kong introduces bill on tax concessions for family-owned investment holding vehicles
The Hong Kong Government introduced the Inland Revenue (Amendment) (Tax concessions for family-owned investment holding vehicles) Bill 2022 (the Bill) on 9 December 2022 regarding a dedicated tax concession regime for family-owned investment holding vehicles (FIHVs) managed by eligible single-family offices (SFOs) in Hong Kong.
As outlined in our earlier Global Tax Alert,1 the proposed tax concession regime will exempt an FIHV and its eligible special purpose entities (SPEs) from profits tax in respect of its taxable profits earned from qualifying transactions carried out or arranged by an eligible SFO in Hong Kong. The provisions in the Bill are substantially consistent with that outlined in the consultation but indeed with several positive enhancements. The Bill is currently under review by the Hong Kong Legislative Council and once passed will take retrospective effect from 1 April 2022.
This Alert summarizes the key provisions of the Bill.
Similar to the existing unified fund exemption regime, an FIHV will be taxed at a 0% concessionary tax rate under the proposed tax concession regime in respect of its assessable profits earned from qualifying transactions carried out or arranged by an SFO in Hong Kong. This includes profits earned incidental to the qualifying transactions, subject to a 5% threshold. The tax concessions will also be provided to eligible SPEs2 owned by an FIHV in proportion to its beneficial interest in such SPEs.
The proposed tax concession regime will take retrospective effect from 1 April 2022. An FIHV can elect for the tax concessions by making an irrevocable election in writing.
Eligibility to the proposed regime
The Bill contains specific anti-avoidance provisions, including anti-round tripping provisions and main purpose test.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
1 See EY Global Tax Alert, Hong Kong proposes family office tax concession regime, dated 22 March 2022.
2 An entity, whether established or created in or outside Hong Kong, is an eligible family-owned SPE or interposed family-owned SPE if it is beneficially owned (whether directly or indirectly) by an FIHV; and established or created solely for directly or indirectly holding and administering one or more investee private companies and any specified assets under Schedule 16C.
3 Entity is defined in the Bill to mean a body of persons (corporate or unincorporate) or a legal arrangement, and includes a corporation, a partnership and a trust. It should be able to cover commonly adopted forms of FIHVs such as foundations, discretionary trusts and anstalts.
4 Members of a family include a natural person and all of the related persons, whether alive or deceased. There is a two-year transitional arrangement in event of a person ceasing to be a spouse other than being deceased.
5 The beneficial interest of an FIHV and an eligible SFO can be held by different family members within the relevant family.
6 Investment activity in relation to an FIHV includes: (a) conducting research and advising on any potential investments to be made by the FIHV; (b) acquiring, holding, managing or disposing of property for the FIHV.
7 The beneficial interest of an FIHV and an eligible SFO can be held by different family members within the relevant family.
8 Specified persons in relation to a family means (a) an FIHV that is related to the family; (b) a family SPE in which an FIHV has a direct or indirect beneficial interest; (c) an interposed family SPE of an FIHV; and (d) a member of the family.
9 In event the aggregated net asset value for the subject year falls below the threshold, the requirement will still be regarded as satisfied so long as the aggregated net asset value at the end of the FIHV's basis period for any one of the two years of assessment immediately preceding the subject year met the threshold.